As an impressionable young reporter, I once proposed to the Maclean’s magazine editorial board that I write a cover story about how the tax system favours the rich. The opposition from the editors was quick and fierce.
One editor thundered that the tax system did not favour the rich; that was just left-wing twaddle. Another editor was equally opposed, but on the grounds that it was an old story with no new angle: Everyone already knew, he insisted, the tax system favoured the rich.
This helped clarify for me a reality that has since been amply demonstrated: Mainstream media are not particularly interested in stories suggesting the rich enjoy favourable treatment from government, even though such stories would seem to be of interest to ordinary, not very rich readers.
So it wasn’t surprising there was minimal coverage last month of the final decision in a rather dramatic court case challenging a secret government ruling that spared one of the richest families in the country a $700-million tax bill.
After all, who would be interested in that sort of thing? Who would want to read allegations of blatant government favouritism toward a rich and powerful family, when they could be reading about the softwood lumber dispute or the leadership chances of Grant Hill?
Still, dull as the case may be to those who dislike insider details about how the rich manage to have their way with our political system, it’s worth forcing ourselves to pay attention anyway, since the case raises some important issues. That’s why the auditor-general first raised questions about it in 1996.
At issue was whether the Mulroney government gave special treatment in 1991 to two private trusts, believed to be controlled by the Bronfman family, by allowing the family to use a loophole to move $2-billion in assets out of the country without paying taxes.
The word “loophole” conjures up an image of a clever lawyer stretching a tax law further than lawmakers had intended, so a client can qualify for a tax reduction.
But that may understate what went on here. There’s a section in Canadian tax law that requires foreigners to pay capital gains taxes on Canadian assets. The clear intent of the section is to ensure capital gains taxes are collected in Canada, even from foreigners.
But wait! Why not use that section to achieve exactly the opposite? Why not argue, as the lawyers in this case did, that the section can be used to allow a Canadian to entirely avoid paying Canadian capital gains taxes when moving money out of the country?
Now that’s a loophole.
When the lawyers for the family originally approached the government asking for permission to bend the tax laws in this way, officials at Revenue Canada strongly resisted.
Of course, as we all know, it’s no big deal when Revenue Canada officials resist the way we’ve calculated our taxes. Chances are they’re only kidding. That’s why most of us simply chuckle if Revenue Canada officials insist we owe more tax, since we know it’s easy enough to get around them.
So it won’t surprise you to learn that the same thing happened here. Within no time, senior officials from the Department of Finance had dropped everything they were doing two days before Christmas to hold top-secret meetings with Revenue Canada officials about the rich family’s request to have their loophole approved.
Before one could say “Peace on Earth” or “Shopping is Good,” permission was granted. As a result, $700-million, earmarked for the Canadian treasury in a time of deficit hysteria, was allowed to leave the country.
Now perhaps this doesn’t seem like much of a problem to those who are constantly pressing for tax reductions for the well-to-do anyway. But one person’s tax reduction is another person’s tax burden; ultimately, the $700-million had to be made up by the rest of us.
This prompted George Harris, a Winnipeg bookkeeper, to sue the government, alleging it had unfairly bent the tax rules for the benefit of one family. The government considered this none of Harris’s business, but Federal Court Judge Francis Muldoon agreed with Harris. In a 1998 court decision allowing Harris’s suit to proceed, Muldoon questioned whether Ottawa’s behaviour hadn’t subverted the purpose of a “free and democratic society.”
“Such a society is not one in which the government should be permitted to make whacking big tax concessions to the benefit of a few and to the detriment of many, who like good little serfs must just shut up and raise no complaint against their betters,” the judge wrote.
In the end, Harris lost. Late last month, Madam Justice Eleanor Dawson ruled Harris had not provided sufficient evidence to prove the government had acted in bad faith and with ulterior motives. But Judge Dawson clearly had some misgivings about the government’s handling of the case. She criticized Revenue Canada for “sloppy practice,” adding that “poor practice of this sort has the potential of compromising public accountability.” She also ordered the government to cover Harris’s costs.
Of course, Harris failed to prove the key point — that the government gave special tax treatment to a rich family. I guess that should put to rest the old concern that governments favour the rich and the powerful. So, next time Revenue Canada assesses you for more than you want to pay, you can be confident senior finance department officials will review your case personally and, in all likelihood, overrule Revenue Canada in your favour.
Count on it.